Bear of the Day: Schulman (SHLM)

A Schulman (SHLM - Snapshot Report) is
coming off back to back negative earnings surprises and the
most recent one carried a big top line disappointment. It is
a Zacks Rank #5 (Strong Sell).
It is the Bear of the Day.

Rubber City

Picking the bear of the day is a difficult thing as it
doesn't mean that SHLM is a bad company or even a bad stock.
It just means the stock has hit a rough patch with estimates
moving lower.

The rubber hit the road for SHLM, a public company since 1972
with 34 manufacturing facilities and 3,300 associates
following the most recent earnings report.

Company Description

A. Schulman supplies plastic compounds and resins for packaging,
automotive, consumer products, and industrial applications.
The company was founded in 1928 and is headquartered in
Akron, Ohio.

Back To Back Misses

The last two quarters have not been that strong. The Feb
2013 quarter saw earnings of $0.27, which were $0.13 less
than the Zacks Consensus Estimate of $0.40. That translated
into a negative earnings surprise of 32%.

The May 2013 quarter was another miss of $0.13, but since
expectations for this quarter were higher, the miss was only
20%. Still back to back misses like this are not what
investors want to see.

Driving the Miss

The real problem with the most recent miss was the softness
on top. By that, I mean that the company came in well below
the Zacks consensus Revenue estimate. A 5.6% short fall on
top makes it exceedingly hard for this company to outperform
on the bottom line.

Earnings Estimates Tick Lower

Of late, earnings estimates have declined. The Zacks
Consensus Estimate for 2013 has slipped from $2.18 in March
to $1.72 August. That sort of decline is something makes a
lot of people take notice is and is the major reason this
stock has its low Zack Rank.

The same could be said of the 2014 Zacks Consensus Estimate
as it
fell from $2.55 in March to the present level of $2.05.
Earnings estimate revisions are the largest component of the
Zacks Rank that can influence a change in rank.

Valuation

The valuation picture for SHLM is in line with the industry
average right now, but that could change over time. A 15.5x
forward PE is slightly above the 14.9x industry average, so a
tiny premium there. The 1.5x price to book multiple is less
than half the 3.3x industry average and a price to sales
multiple of 0.4x is almost a third of the 1.1x industry
average. Almost a value stock, but the revenue growth for
this year is negative and next year is only supposed to be in
line with the industry average. Factor in a 1.9% net margin
vs a 7.7% net margin for the industry average and investors
may want to wait till the bottom line improves.

The Chart

The price and consensus chart shows a disturbing trend in
earnings estimates. The stock has moved up through the
changes in earnings estimates, which start the year with some
growth but have given that all back down the road. As a big
Buckeye fan, I can say they are headquartered in the right
spot, but SHLM needs to improve margins and grow revenue to
get back on the right track.

Brian Bolan is a Stock Strategist
for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor
service, a Buy and Hold service where he oversees the 20
stocks in the portfolio, telling investors when and what to
buy and sell.

Brian is also the editor of Breakout Growth
Trader
a trading service that focuses on small cap stocks and
also
carries
a risk limiting strategy. Subscribers get daily emails along
with
buy, and sell alerts.